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Biotech Can’t Sidestep Cost-Effectiveness Anymore

Back in the old days of biotech, the business was pretty straightforward. You’d craft your scientific idea, aim a new drug at patients in need, charm investors to give you some money, run bang-up clinical trials, win FDA approval. Do all that, and you’re good as gold. Charge insurers whatever the market will bear, and count the money.

That model worked for a long time, but there’s another hoop everyone needs to jump through now, and I’m not sure everyone in the industry has fully come to terms with it. No matter what happens with President Obama’s healthcare reform in the Supreme Court or Congress, there are forces now that limit what society will pay for new drugs. We don’t have actual price controls in the law, but the pressure to wring costs out of the $2.6 trillion U.S. healthcare system is intense and will only grow as the baby boomers get older. Drugmakers can’t duck and hide from this issue anymore.

This thought came to mind when reading some medical stories this past week that, as usual, said little to nothing about cost. News came from the American College of Cardiology meeting, where Sanofi and Regeneron Pharmaceuticals (NASDAQ: REGN) released impressive clinical data for their new cholesterol-lowering drug, around the same time similar results came out from Amgen (NASDAQ: AMGN). These drugs are genetically engineered antibodies that zero in on a target called PCSK9. The science is elegant, and the medical need for lowering cholesterol is significant.

But here’s the rub. Cheap generic statins will surely be working quite well for millions of people by the time these new antibodies hope to reach the market in a few years. Antibody drugs by their nature are expensive to manufacture, and come with much higher price tags than pills. So these antibody makers will have to decide at some point—do we want to charge a premium price for treating a small population of statin non-responders with great needs, or do we try to lower the price and go after a broader market of patients who simply want a more effective alternative to statins? While these new drugs may look good on paper with their ability to bring down LDL counts, insurers preparing to spend real money on these products will rightfully want to know whether these new agents can lower the long-term risk of heart attack, stroke, and death when compared to a statin. That is a very long, expensive, and risky question to ask in clinical trials.

Even if the drugmakers can answer that question, I just can’t see an antibody drug catching on at $1,000 a month, potentially for tens of millions of people. You can be sure that if the drugmakers aim for the masses with these new antibody drugs for lowering cholesterol, insurers will push back hard. Questions could include: How much hospitalization time will the new antibody save? How many more years will people live on the antibody? How many years will patients on the drug be able to remain in the workforce? How much of the cost burden should patients have to shoulder themselves with co-pays?

These drugs are still in early development, so there’s time to answer these questions. But what we’re talking about is a profound new set of rules for drug development. It’s about showing that new drugs are safe, effective, and save the healthcare system more than they cost.

Randy Schatzman, CEO of Alder Biopharmaceuticals

“It’s not enough to get a drug approved anymore, you need to get people buying it,” says Randy Schatzman, the co-founder and CEO of Bothell, WA-based Alder Biopharmaceuticals. “We’re moving into a brave new world in the next few years.”

Alder is a good example of a company that thought about cost-effectiveness back when it was founded in 2004, before this issue became so urgent. The company’s basic technology enables it to produce antibody drugs in fast-dividing yeast cells, instead of the usual mammalian cells. That means Alder should be able to make its drugs faster and cheaper than its competitors. Having a lower cost of raw materials means Alder should someday be able to sell its products at a lower price, while maintaining healthy profit margins. Its pitch to insurers will be about offering what it hopes will be a slightly more effective drug at a lower price. After weighing all these factors—safety, effectiveness, cost-effectiveness—Alder has decided it’s ready to advance its own anti-PCSK9 antibody into its first clinical trial this year, Schatzman says.

Venture capitalists have been taking the new cost-effectiveness mentality seriously for some time now. Brook Byers of Kleiner Perkins Caufield & Byers spoke last November at the Personalized Medicine Conference about how his firm makes a habit of inviting major insurers in to its offices to meet with its partners, and entrepreneurs at its portfolio companies, about what they’ve got to start doing to prove the value of their products—beyond whatever clinical effectiveness goal gets set by the FDA.

The cost of goods does not drive the price of the drug. It’s the cost of failures. The Alder CoGs are not significantly different than a modern high-titer mammalian process so there is little leverage there.

“While those stories get a lot of attention—ask Dendreon—there are still quite a few companies charging high prices with less resistance. Some of the new personalized medicines—Roche’s vemurafenib (Zelboraf), Pfizer’s crizotinib (Xalkori) and Seattle Genetics’ brentuximab vedotin (Adcetris) for example—have proven they can charge very high prices for their cancer drugs with little pushback from insurers because their drugs are so effective for a well-defined genetic subgroup of patients.”

Huh? What am I missing? The issue with Provenge was not cost, but ‘cost density’…$93,000 for three treatments administered over a period of one month. If that cost had been spread out over four, or six, or 12 months, you probably would not even have cited it in your column today. Some treatments today cost well over $100,000, and they are paid without so much as a blink of an eye.

Yes, keep a firm eye on Cost of Goods in product development. Cost-effectiveness has been with the industry for a long time and can impact product choice and new product adoption significantly, this is well documented across the EU and the North America. Cost of goods (COGs) is an important variable in commercialization because it often determines your pricing flexibility in competitive situations. As the smaller markets (even cancer) become crowded with multiple competing offereings, products with similar clinical benefits will compete on other factors such as price and cost-effectiveness. Products with inherent COGs advantages, e.g., synthetic peptides vs. proteins, will have an advantage in the contracting process and product selection. We recommend that companies strive for the lowest COGs possible, consistent with the highest product quality at all points in the product development cycle. The pre-launch plan should always have a product optimization pathway that drives the COGs lower as the product reaches the market. COGs are important and this strategy allows you to negotiate EU entry reimbursement packages with EMA and not penalize pricing in the rest of the world.